It played a major role in the defense of West Germany from the Soviet Union during the Cold War. The division was constituted on October 1, 1956 as part of the III Corps of the Bundeswehr. In 1985, the corps also received the 2nd Panzergrenadier Division and 12th Panzer Division. Subordinated to NATO's Central Army Group, the III Corps defended the "zone of vital defense" of NATO, at the side of the II Corps of the German Army and the U.S. Army's V and VII Corps.

Following the Soviet Union's fall, the US VII Corps was withdrawn and two combined US/German corps were created in the former CENTAG area. As part of this arrangement, 5th Armoured Division was administratively placed under the V Corps (United States) for main defence purposes. This meant that if an attack from the East was anticipated, the division would fall under U.S. control. Meanwhile an American division would likewise fall under control of the German II or III Corps. The 5th Panzer sent some of their units to Yugoslavia in 1990. German budget constraints meant that the 5th Panzer Division had to be indefinitely disbanded on June 30, 2001.